Scheduled to be launched on September 1, 2012, a new Medicare demonstration project for power mobility devices (“PMDs”) will test a claims processing methodology which departs from longstanding approaches in the Medicare fee-for-service program.2 Through the Prior Authorization of PMDs Demonstration (the “Demonstration”), the Centers for Medicare & Medicaid Services (“CMS” or the “Agency”) has proposed to require physicians and suppliers in seven states to obtain authorization from the applicable Durable Medical Equipment Medicare Administrative Contractor (“DMAC”) before delivering a PMD to a beneficiary and submitting the claim for payment.3 Though similar prior authorization approaches are well established in the private sector,4because of constraints to the statutory framework, the Medicare fee-for-service program has to date incorporated such a payment methodology in only a limited subset of claims and on an optional basis, as noted below. CMS views the prior authorization approach as an adjunct to anti-fraud efforts, and it is the first time that the Agency targets a mandatory claims submission policy through its demonstration authority. The Agency has stated that it selected the prior authorization approach to develop alternatives to the oft-criticized “pay and chase” model. An important model to track, this Demonstration may be an indication of future trends for other areas of the Medicare program.

The Proposed Prior Authorization of PMDs Program

First announced on November 15, 2011, CMS justified the Demonstration as a new method to fight fraud, waste and abuse, relying on reports prepared by the Department of Health and Human Services’ Office of Inspector General (“OIG”) and the Agency’s Comprehensive Error Rate Testing (“CERT”) program.5 The 2010 CERT Report identified PMDs as a “high risk” benefit area, and noted that PMDs were among the durable medical equipment (“DME”) benefits with the highest rates of improper payments.6

CMS selected the entirety of “high fraud” states where there has been heightened focus for enforcement by several components of the federal government: California, Florida, Illinois, Michigan, New York, North Carolina, and Texas. These states represent approximately 43 percent of Medicare’s total 2010 PMD expenditures. Once the Demonstration begins, physicians and suppliers of PMDs in these states must receive prior authorization from their DMAC before delivering the item to the beneficiary or submitting a claim for payment.7 CMS expects the Demonstration to result in 325,000 annual prior authorization requests, totaling almost one million requests and almost $800 million in claims over the three-year life of the Demonstration.8

To comply with the prior authorization requirements, submitters must send the DMAC the physician’s order and progress notes documenting the face-to-face examination, and any other medical documentation necessary to justify the claim. The DMAC is required to respond within 10 days, either affirming or denying the prior authorization request and explaining the reason for any denied requests. Upon receiving an approved request, the physician or supplier may deliver the item and submit the claim. If the request is not affirmed, the submitter may re-submit the prior authorization request; because the prior authorization decision is not an initial determination, no appeal rights attach to this decision.

To ensure provider participation in the Demonstration, CMS instituted a significant penalty for failure to comply. Claim submitters who do not receive prior authorization before submitting the claim for payment will be subject to further claim development through what is known as the additional documentation request (“ADR”) process.9This means that an audit of documentation — covering all documentation required for prior authorization in addition to a home assessment performed by the supplier — is completed before the claim is paid. In addition, beginning 3 months after the September 1 start date, suppliers that do not obtain prior authorization before submitting PMD claims for payment will only be eligible to collect 75 percent of the allowed Medicare payment. This 25 percent penalty would be applied in areas where the fee-for-service payment has not already been reduced to a “single payment rate” under the competitive bidding program, currently in its early rounds.10

The protocol selected by CMS marks a meaningful departure from the Agency’s current prior authorization process, the Advanced Determination of Medicare Coverage (“ADMC”) program. This limited, voluntary program is designed to assist suppliers with ensuring coverage for select items of DME, such as customized rehabilitation wheelchairs.11 In contrast, the Demonstration targets a significant portion of the PMD market and is designed to limit improper payments (and, as a result, benefit expenditures) through penalties for noncompliance. ADMC will continue to be available in states outside of the Demonstration area, but CMS has indicated that the Demonstration will replace ADMC for PMDs subject to the Demonstration in the seven states.

Justification for Demonstration and Industry Response

Although prior authorization is a common cost-containment tool of private payors and state Medicaid programs, it is novel for the Medicare fee-for-service program; so novel, in fact, that CMS does not cite to any specific statutory provision that authorizes the Agency to institute a prior authorization initiative. As recently as 2008, CMS officials had indicated that they were not aware of any statutory provision explicitly authorizing prior authorization.12 CMS therefore relies here on its broad demonstration authority “to develop and engage in experiments and demonstration projects.”13 Specifically, of the 11 enumerated purposes authorized by the demonstration authority, the Agency specifically characterized this Demonstration’s purpose as a project “to develop or demonstrate improved methods for the investigation and prosecution of fraud.”14 Rarely exercised, previously CMS has used this authority to require certain Medicare providers in certain “high-risk” counties to submit reenrollment applications that would be subject to additional scrutiny.15 This Demonstration, however, is the Agency’s first attempt to alter the Medicare claims submission process or to incorporate such a broad swath of the country.

Since announcing the Demonstration in November 2011, CMS has faced criticism from physician and supplier groups. A number of commenters have questioned the scope of the Agency’s demonstration authority and whether it authorizes such a significant change over such a substantial portion of the PMD benefit. Many initial comments also took exception to a lack of transparency and notice when CMS originally announced the Demonstration would begin on January 1, 2012.16 In response, CMS revised the program, delayed the start date by over eight months, and accepted comments from the public in connection with a Paperwork Reduction Act filing with the Office of Management and Budget. The Agency nonetheless continues to assert that a project of this size and scope may be enacted through the Agency’s demonstration authority.

What’s Next?

Given the overwhelming pressure on CMS to address perceived Medicare overpayments, this Demonstration forces a host of questions: Is this a payment model that CMS might seek to apply in other benefit areas? Will there be additional statutory authority developed in the future to do so for all Medicare benefits under the fee-for-service program? What other claims processing changes are implicated as a direct consequence of a prior authorization model?

In light of the Agency’s reliance on the CERT Report to identify DME and PMDs as areas in which to test this authority, other benefits singled out by the program appear to be likely candidates for further expansion of demonstration efforts. Within the DME benefit, for example, the 2010 CERT Report also found that claims for oxygen supplies and glucose monitoring supplies also were associated with elevated rates of improper payments.17 Beyond DME, home health was identified as a “high risk” benefit18 in which the leading cause of improper payments was found to be the provision of medically unnecessary services.19 The CERT Report thus may be a predictor of the next targeted areas for the prior authorization payment model.

CMS may also target fee-for-service benefits that have previously been suggested for prior authorization. Specifically, in 2008, a report issued by the Government Accountability Office (“GAO”) reviewed private insurers’ use of prior authorization to control escalating costs stemming from imaging services. Although CMS expressed reservations about its authority to implement prior authorization at that time,20 experiences with the current Demonstration may favorably incline the Agency to revisit this and other areas as a next focus. Further, issues associated with claims errors, such as documentation deficiencies, may be targeted for revisions as part of the prior authorization process. For the PMD benefit, for example, CMS has undertaken an initiative to develop an electronic template that would assist physicians with the recording of medical record documentation to show that Medicare coverage criteria were met for their patients. The template is currently being designed as an optional document outside the scope of the Demonstration.

Providers and suppliers alike may want to closely watch the Demonstration as it develops. Given the healthcare cost-containment pressures generally and longstanding experiences by other payors in this area, the current exploration by CMS of prior authorization for its administration of the Medicare fee-for-service program may be an indicator of a paradigm shift in claims processing policies.

CMS contractors currently have discretion to collect additional documentation from providers and suppliers through the ADR process when the contractor is not able to make a determination on a claim chosen for prepayment or postpayment review based on the documentation available to the contractor. See CMS, Medicare Program Integrity Manual, Pub. 100-08, Ch. 3, § 3.2.3.

Under the Competitive Bidding Program for Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (“DMEPOS”), CMS contracts with select DMEPOS suppliers, including PMD suppliers, to furnish certain items in competitive bidding areas (“CBAs”) at amounts determined through a competitive bid process, usually resulting in a lower payment than otherwise available for the item under the Medicare DMEPOS fee schedule. The program currently covers nine CBAs related to major metropolitan areas and will expand to ninety-one new CBAs in Round 2, scheduled to begin in July 2013.

In 2007, CMS instituted three separate demonstration projects targeting provider enrollment: (1) the Medicare Provider Enrollment Demonstration for Home Health Agencies in High-Risk Areas, covering Harris County, Texas and the Los Angeles metropolitan area; (2) the Medicare Integrity Program Demonstration of Infusion Therapy in High-Risk Areas, covering three counties in South Florida; and (3) the Medicare Provider Enrollment Demonstration for Suppliers of DMEPOS in High-Risk Areas, again covering South Florida and the Los Angeles metropolitan area.

See CMS, Prior Authorization of Power Mobility Devices (PMD) Demonstration: CMS Adopts Changes in Response to Industry Feedback, available at http://blog.aahomecare.org/2012/02/normal-0-false-false-false.html.